Social Security Report: What is the “Low Cost Alternative”
Well one answer it line I in the above figure from the 2015 Social Security Report.
Figure II.D7.—Long-Range OASI and DI Combined Trust Fund Ratios Under Alternative Scenarios
[Asset reserves as a percentage of annual cost]
Under the definitions used by the Social Security Actuary and Trustees the program is ‘Solvent’ over the short term if it never gets within 10 years of dipping under the 100% line in this figure, ‘Solvent’ over the long term if it never hits that 100% line in the 75 year actuarial window and ‘Sustainably solvent’ if the line is trending upwards as it leaves that window. Under this year’s Low Cost Alternative it would meet all those tests.
Now there are two ways to look at “Low Cost”. One is as a combination of economic and demographic numbers that are together riding the outer edge of the probability band. Which is to say a combination that if current policy remains unchanged will have maybe a 5% chance of occurring. From that perspective it is just Pie in the Sky optimism. The second though is to see its OUTCOME as a target and to use the various components of Low Cost to show us where to focus our attentions. For example if we hold demography steady would improvements in Real Wage Differential and Productivity move us closer to Solvency? Well we just need to inspect the relevant Table.
In this case Table V.B1.—Principal Economic Assumptions
And the first order answer is “Yes, improvements in those two metrics improve solvency, move us closer to the desired outcome”. Now the second order answer might be “But the specific projections are still too optimistic, maybe we can move in the direction of Low Cost, but not get all the way there”. Which doesn’t mean just dismissing Low Cost, instead accepting that it gives us policy guideposts “Go THAT way!”. And why not? So what if the realm of the possible puts limits on our reach? If getting halfway to the goal via this path does good things for Social Security and good things for the economy at large why shouldn’t we use them as deliberate targets for active policy?
In future posts I will put us some specific projections of Low Cost and ask why they are out of reach. Note I will not be asking why the entire combination of projections is feasible. Because Low Cost is an artificial model that assumes that a lot of things break in a positive way, not all of which may be realistic. Which doesn’t subtract from the reality that if we can move 6 of 10 variable in that positive direction then positive effects are seen.
Thanks for all your work on this. I wish there was a “tip jar” here for donations or a GoFund site where we could show our appreciation materially.
Thanks Jim. Maybe I should crank up my blog(s) and stick up a PayPal button.
But that would require a degree of effort plus an excess of self regard that I am not sure I can reach. So I’ll just take thanks as payment in full.
well, i was one of those tired of the time value of money. but no one even offers to pay me for my time.
is there a “single years” table for 2015 up? i can’t seem to find it.
The link is in the main body text of
well, it appears to load and then goes blank after two seconds.
Loads for me. Maybe try to copy and paste rather than click.
nope. they must have me on their do not call list.
you know: “don’t call us. we’ll call you.”
I have a project in mind that will extract all those into a single Excel file and then export them as .png image files. Will keep you posted.
“Thanks Jim. Maybe I should crank up my blog(s) and stick up a PayPal button.”
Anything besides PayPal.
Well I do accept medium sized bills in a plain envelope slipped under my front door. Just sayin’.
For SS “low cost” means very high inflation and very high interest rates. Well, what is good for SS is certainly not good for the broad economy (or those who receive SS benefits).
The Federal Reserve has pledged (hundreds of times and with every Fed President) that it would not allow inflation to rise above 2%. It is interesting to note that the “low cost” for SS has an inflation rate that exceeds the Fed’s target by 70%.
It is also interesting that the intermediate case has inflation significantly above the Fed’s PROMISE for the next 75 years.
Only the High Cost outcome has inflation at the Fed’s 2% target.
Possibly Webb thinks that the Fed’s policy stance on inflation can be altered so that SS could do a bit better. But I would not count on that outcome. Webb – never fight the Fed………
3.4% inflation is not “very high”. It is significantly below the rates we saw from 1965 to 1990. And expressing that is percentage terms above the CURRENT Fed target of 2% to get a scary 70% is ridiculous out of context crap. To put it politely.
And a TARGET is not a PROMISE. Where is there evidence that the Fed intends to keep a 2% inflation rate forever? You say “hundreds of times”. Care to supply one or two?
Nor do I see Low Cost interest rates of 6.8 nominal and 3.4 real as being “very high” either. Real rates were higher than that from 1980 to 2000 and while not every year was great it wasn’t like the U.S. was Weimer Germany or Zimbabwe in those years.
At a minimum you could have actually cited the numbers in question rather than deploying that second order 70% and a contextless “very high”.
Come on man, we have on occasion managed some civil and data infused conversations. But you seem to have some irresistible desire to troll my comment threads. I certainly am not free of fault here, buy why take it out on Angy Bear readers?
Webb – I apologize. I have made this mistake before. I incorrectly assume that you understand the basics of financial analysis.
This is not black box stuff. It is 4th grade math. 3.4 is 70% larger than 2.
2 * 1.70 = 3.4. If you need more help with percentage changes – buy a book.
You have written several times about the Federal reserve. So forgive me for assuming that you have a clue as to what Fed policy is, and what the Fed has said about inflation. From your challenge of “Show me sources” it confirms to me that you don’t know what Fed policy is, nor do you read any of the policy statements from the Fed Chairman.
A major statement from the Fed comes once a year. It is referred to as Humphrey-Hawkins. The most recent was 7/15. Yellen said:
The Committee will determine the timing of
the initial increase in the federal funds rate
on a meeting-by-meeting basis, depending
on its assessment of realized and expected
progress toward its objectives of maximum
employment and 2 percent inflation.
Got that? It’s not a target. Its a mandate.
Yellen also had this to say:
Transparency concerning the Federal Reserve’s
conduct of monetary policy is desirable because
better public understanding enhances the
effectiveness of policy. More important,
however, is that transparent communications
reflect the Federal Reserve’s commitment to
accountability within our democratic system
She’s telling Congress that she/The Fed is accountable for what she says. She does that to to convince legislators, business people, global leaders, investors and even bloggers that she stands on her word. You ought to listen.
Only fools ignore what the Fed says. Yet we have SSA that has its Intermediate Case based on something the Fed has said will not happen. In fact, what the Fed has stuck to is the “High Cost for SSA.
Who you going to believe? The Fed or some bureaucrats at SSA?
I’m not going to fill up AP pages with the hundreds of times Fed officials have committed to the inflation mandate. I leave it to Webb to find a find statement that contradicts the Fed’s commitment to its mandate.
Everything anyone at the Fed has said can be found here:
Krasting this is why I am not nice to you. Anyone reading my comment can see that I immediately figured out where your 70% came from. My point was that you didn’t supply the numerator and denominator in a way to see whether the inflation rate was actually high or not. Your 70% added no information value at all.
And I do follow Fed policy and am well aware of Fed targets for inflation and interest rates. For example in relation to inflation I said this:
“above the CURRENT Fed target of 2% ”
My question is whether the Fed actually sees a 2% inflation rate as a permanent target and consistent with its dual mandate. Or whether they could tolerate another point or two if that was a byproduct of an economy at full potential.
Perhaps they have settled on that as an ultimate number. But that isn’t made clear in the quote from Yellen where the language about “meeting by meeting” suggests some reference frame this side of the Infinite Future Horizon.
And I have books. Lot of them. Perhaps I could send you one with instructions of my own.
And rather than just lazily sending me a link to the Federal Reserve main site you could have taken ten seconds to actually find something supporting your point. Which I just did. And it does support your point. But how would anyone know that when you are just shouting down at the peasants off your High Horse.
Personally I don’t see what is magic about 2% inflation and it seems that some economists feel the number was more or less pulled out of a hat. But it is in fact the official number. Good for YOU! Have a treat!
i suppose it’s possible in your world that a 70% increase in an interest rate would be a big deal… big money. but when the increase is applied to a small part of a problem in which each person has a very small part of the “take” it doesn’t amount to much. absent a better discussion, i think Webb’s point was well taken.
As for what Yellen says… I think you are reading too much into it. Note they had to “examine the progress toward…”
Coberly – the discussion about a 70% increase was about inflation. not interest rates. Stay on point, or don’t kibitz.
Webb – We now agree. The Fed is, for now and well into the future, an immovable rock. They will adjust monetary policy to achieve an average inflation rate of 2%.
If that is the case, then the Intermediate Case (on inflation) would be flatly rejected by Yellen. And there is no chance that the Low Cost assumption (on inflation) will come true.
Understand that when I see these glaring inconsistencies I conclude that the SSA projections will not be realized.
FYI – in the past year the price of oil is down 50%. Copper down 25%, Iron ore down 50%. Everything in the commodities world is down big.
The chance for inflation is very slim for the foreseeable future. Deflation is a greater risk. SSA is banking on high growth, high inflation high interest rates – those are not reasonable expectations for the next decade. So in 5 years I’ll be pointing out how far off the mark SSA was in 2015.
“So in 5 years I’ll be pointing out how far off the mark SSA was in 2015.”
Yeah well when the CBO Social Security update came in December you were predicting the SSA Trustees would be revising their number towards CBOs 3.9%. Turns out it moved the other way. So not too surprised you moved your “I”LL SHOW YOU” claims five years out.
I really don’t have time to go back and review all your past projections but I am not shaking in my boots at this new one.
So yeah I guess we will see. I don’t see deflation on the horizon and I don’t see Intermediate inflation and interest projections as being particularly “high”, as noted previously they are within historical norms.
But as they say opinions are like assholes, everyone has one. Or is one. Including me.
you were talking about inflation when you went oooh! that’s a big one.
i said that in your field a 70% increase in interest rate would indeed be significant. if that is your idea of going off point, it is no wonder you can never figure anything out.
i was going to suggest you work out what the effect of a “70% increase” in the inflation rate would be on SS. you might learn something about negative feedback in complex systems.
but that would indeed be asking too much.
i remember th Fed chasing an inflation rate in ’79 and ’80. They damn near ruined the economy.
But while Yellen may know something the Trustees don’t, I would not bet that you do.
Coberly – You want me to figure out the consequences of a 70% difference in inflation outcomes? You don’t have to rely on me for that calculation. SSA does it for you in the 2015 report.
The difference is that SS goes from the Low Cost to the High Cost outcome.
You can look at the results between High and Low Cost outcomes in table IV.a3 of the SSA report.
Janet Yellen is telling us to prepare for an inflation rate of around 2%. SSA is telling us that the future will not be what Yellen is telling us.
Study the High Cost results – you won’t like those results at all. If High Cost is in our future SS is in deep do-do.
actually I was going to suggest YOU look at the sensitivity analysis. apparently you have. but at least one of us does not understand it.
why don’t you try to explain what you think it means, or you mean, without hysterical language that contains no cause-effect thinking whatsoever. just “look at that number! it’s Sooo Big! Oooh! We’re all going to Die!”